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Got Guidance? Not Much, Says Judge Rakoff, If SEC Admin Enforcement Carries The Day.

By Dennis Stubblefield, Esq. of Shustak Reynolds & Partners, P.C. posted on Friday, November 7, 2014.

Dennis A. Stubblefield

Dennis A. Stubblefield


This last week saw two notable developments: Judge Rakoff’s speech at PLI, and the NYT Op-Ed piece calling for the SEC to adopt a DMV-style “point” system to provide scaled-up deterrence and license-yanking for repeat offenders.

In his address before PLI’s 46th Annual Institute on Securities Regulation, the Southern District’s Judge Jed Rakoff, no stranger to in-your-face judicial challenges to the integrity of SEC Enforcement, sets forth his concerns that, on its unabated admin march, the SEC could become a “law unto itself.” He provides a mini-primer of the key principles of administrative law as well as a history of what he terms the SEC’s “administrative creep,” which has culminated recently with its hiring of lots of new ALJs and supporting staff, and its announced “new normal” of admin proceedings trumping civil injunctive actions in federal court (this past week, for example, “the SEC filed 5 civil injunctive action[s] and 28 administrative proceedings, excluding 12j and tag-along-actions,” per Tom Gorman’s blog.

Judge Rakoff is very concerned that this trend will result in a paucity of meaningful guidance going forward, much less any true jurisprudence. Those of us who serve independent contractor broker-dealers and their customers–no, not retail customers of the BDs, but the “business customers” of the firms, the OSJs, the reps and the rep groups who are responsible for generating revenue–know full well about lack of guidance: one of downsides of mandatory arbitration has been a quarter century of virtually no jurisprudence about the nature and extent of firms’ obligations to their retail account-holders.

We look forward to further healthy debate about the future of SEC Enforcement, including evaluation of approaches such as a point system for recidivists. For now, though, IBDs and their troops must assume that meaningful guidance will be in short supply, and that they will continue to be in danger of getting “gotchaed” by the regulators, as well as second-guessed after-the-fact by account holders and others. Firms should redouble their compliance and risk-management efforts on the front end and mid-stream, in order to be demonstrate on the back end–on both the regulatory and dispute resolution sides–that the integrity of their system and process is solid as a rock.

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